Monetary Policy Ambiguity: Yellen at Jackson Hole

1) Monetary policy has two goals: maximum employment and stable inflation. Policy at any moment of time requires the assessment of where the economy is and where it is likely to go. That assessment is clouded by the inability to specify how much unemployment is cyclical and how much is structural. If the former, possibly it can be treated with monetary policy instruments. If the latter, it is beyond the Fed’s reach.
2) The inflation target has essentially been reached but the Chairwoman, still thinks there is “slack” in the labor market. She concedes that the differentiation between cyclical and structural unemployment is hard to make, but looking at the plethora of indicators in the labor market, she feels that the current level of (monetary) accommodation, is appropriate, particularly in view of the scheduled run off of central bank purchasing of Treasuries and MBS.
3. The difficulty with this assessment is that judging labor market conditions is at best extremely difficult. Forecasting how a continuation of the current policy target will affect labor markets in the future may beyond the Fed’s capability. Certainly, no single labor statistic is sufficient while how to mix them for maximum forecasting is not without controversy. She hints at the research going on within the Fed on a ‘factor’ analysis, but that will not convince markets in the short run
4. Fed guidance in such circumstances is unclear. Worse, using a potpourri of labor market stats will probably confuse markets more than it will enlighten them. Sometimes too much information overpowers common sense.
5. Ad Hoc tinkering or policy rules? At the end of the day, the larger issue of whether to base future policy on statistical babble or to adhere to a well understood policy rule is not treated in this speech. This Fed continually runs away from establishing a clear rule—one that markets might be able to discern
Markets will glean little from this speech. Equity and fixed income markets will continue to oscillate in the absence of clear central bank guidance and the troubling geopolitical events of the day.